Financial Accounting

FINANCIAL ACCOUNTING

Double entry accounting system is a system of recording transactions that recognizes that there are two sides (or aspects) to every transaction. However for the double entry system, the two fundamental equality requirements are that firstly, the total debits (left side of the account) must be equal to the total credits(right side of the account. Secondly, the accounting equation Assets = Capital + Liabilities must always needs to balance after every transaction and the equality must be maintained. This means that assets must have equal claims.

Double entry accounting system divides each page into halves. The left side of each page is called the Debit side, while the right side is called the Credit side (Business Accounting by Frank wood).

With the help of debits and credits, assets, liabilities and capital are recorded in the accounting books and this helps to show whether it has increased or decreased.

If an asset increased we will make a DEBIT entry and similarly if asset decreased we will make a CREDIT entry. In the same way if liabilities increased we will make a CREDIT entry and if it decreased we will make a DEBIT entry. Moreover, common stocks and retained earnings have the same accounting treatment. If common stocks and retained earnings increase we will make a CREDIT entry whereas if both get decreased we will make a DEBIT entry. Revenue and expenses are considered as opposite of each other. If revenue increased we will make a CREDIT entry and if expenses increased we will make a DEBIT entry and vice versa. Finally if the dividends increased we will make a DEBIT entry and if it decreases we will make a CREDIT entry.

A stock inventory is a record of goods received by, and used or sold by, a business. A perpetual inventory system helps to maintain a running balance of stock-on-hand after each transaction. Under the perpetual inventory system a detailed record of each item is kept which shows the movements of goods on purchase and...